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Funding source specified for a Board vote

SCENARIO:
Recently, a non-Board member attempted to nullify a Board vote. The vote was for approving a few hundred dollars to install internet access at our front entrance. It was well below our CCR-defined $-threshold for a capital expenditure. The Board approved it unanimously. She insisted that the vote was not valid because the vote did not specify where the money would come from (i.e., reserve fund or operating budget). Obviously it would come from the operating budget. The Board argued that the vote was valid and that the Treasurer and our community manager would figure out which “bucket” the funding should come from after the vote. She insisted that, to be valid, all votes must specify where the source $$$ will come from.

Was she right that, to be valid, the vote must first specify where the funding comes from?

2 Responses

  1. dennisl

    In general Reserve funds should only be used for major projects. An expenditure of $100 should come from the operating fund and not the reserve fund. Most association do not but should have established rules governing these transactions. I’ve seen boards deplete their reserve funds by these Nickle dime expenditures and when they need it for major items there is none left. They effectively use the reserve fund as a slush fund to supplement their operating budget. Depending on how the association files their taxes the IRS has specific rules relative to the use and funding of reserve accounts.

    As for the validity of the board vote there is no requirement that board designate the source of funds for any approved expenditure and no homeowner has the power to nullify any board decision. Having said that, boards should at all times when approving an unbudgeted expenditure designate the source of the funds to pay for that expenditure. Leaving it up to the management company is a total breach of their fiduciary duty to the association, and the community. There is nothing that prevents a board from using operating funds for for an operating expenditure even if that specific item was not included in the defined budget for the year.

    Once this is one of those cases where there is a big difference between what an association can or must do and what they should do to effectively satisfy their fiduciary duty to the community.

    Dennis

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